VZCZCXRO5058
PP RUEHCN RUEHGH RUEHVC
DE RUEHSH #0174/01 2550910
ZNR UUUUU ZZH
P 120910Z SEP 07
FM AMCONSUL SHENYANG
TO RUEHC/SECSTATE WASHDC PRIORITY 8183
INFO RUEHOO/CHINA POSTS COLLECTIVE PRIORITY
RUEATRS/DEPT OF TREASURY WASH DC PRIORITY 0210
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC PRIORITY 0769
RHEHAAA/NSC WASHDC PRIORITY

UNCLAS SECTION 01 OF 02 SHENYANG 000174 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
STATE FOR EAP/CM PSECOR, JYAMAMOTO 
TREASURY FOR OASIA RDOHNER, BCUSHMAN 
USDOC FOR 4420/ITA/MAC/CEA/MCQUEEN 
USTR FOR BHATIA/STRATFORD/WINTER/ALTBACH/MCCARTIN 
 
E.O. 12958: N/A 
TAGS: ECON ENRG EINV EPIT EFIN CH
SUBJECT: CHINA/SOE REFORM: A DALIAN PERSPECTIVE 
 
REF: BEIJING 005639 
 
 ¶1. (SBU) Summary.  Dalian's State Assets Supervisory and 
Administration Commission (SASAC) is, like other SASAC 
entities throughout China, seeking to reform its thirty-eight 
state-owned enterprises (SOE), by improving internal 
management, reducing the overall number of companies, and 
changing ownership structures, both through joint ventures 
and through stock-listing of companies.  Dalian SASAC 
controls a variety of companies in critical areas such as 
petrochemicals, transportation, and power generation which 
complicate the emerging ownership picture.  Dalian SASAC 
Deputy Director, Yu Baohe, said the overall goal is to 
develop four industrial bases--petrochemical, shipbuilding, 
equipment manufacturing and information management 
software--around Dalian's rapidly developing logistics and 
transportation center.  He also said that the total number of 
assets would be reduced to enhance efficiency. End Summary 
 
¶2. (SBU) In discussions with Econ Minister Counselor, Mr. Yu 
cited several different industrial companies that are 
currently undergoing changes in ownership structure.  He said 
SASAC's goal is to achieve a variety of ownership structures 
tailored to the needs of particular industries.  For example, 
Dalian Heavy Industries-Dalian Crane Works Group Ltd., a 
manufacturer of large cranes, wind turbines and cargo 
handling equipment, is trying to attract strategic investors 
to purchase thirty-five percent of the overall shares, with 
the remaining sixty-five percent being secured by its 
existing assets.  Bidding for the shares is on-going.  Mr. Yu 
mentioned several financial houses interested in the project, 
including Bain Group, JP Morgan Chase and the World Bank's 
Rural Finance Corporation.  Another key Dalian SASAC asset, 
Dalian Machine Tool Group is also pursuing capital via a 
share offering, planning to list on the Hong Kong Exchange. 
 
¶3. (SBU) Yu mentioned several other companies which are 
pursuing joint venture arrangements with foreign firms.  He 
noted that one of the earliest of these operations is 
Goodyear's joint venture with Dalian Bingshan Group, of which 
Goodyear owns seventy-five percent.  Yu said that Dalian 
Bingshan is presently negotiating with Japan's Sanyo 
Corporation to establish a similar arrangement in the 
manufacture of air conditioners. 
 
¶4. (SBU) While these negotiations are fairly straightforward, 
Yu pointed out that the nature of the industry can sometimes 
complicate joint ventures.  As an example, he mentioned 
Wafangdian Bearing Group's negotiations with SKF, the world's 
largest bearing manufacturer.  SKF would like to establish 
the joint venture via a stock acquisition, but since 
Wafangdian is a key defense industry supplier, foreign 
investors are not allowed to hold a controlling interest.  Yu 
said the final ownership ratio is still under negotiation. 
 
¶5. (SBU) Other key developments in Dalian include the West 
Pacific Company, an oil exploration and development joint 
venture involving Dalian SASAC, Sinopec and France's Total, a 
joint venture for port development with Maersk-Sealand, and 
Dalian Ship Heavy Industry's Lushun Shipyard.  Yu pointed out 
that other aspects of development in public transportation, 
thermo-power, and infrastructure are going to remain fully 
state owned. 
 
¶6.  (SBU) While overall trends for development are excellent, 
Yu pointed out that some companies will be allowed to go 
bankrupt and their assets will be liquidated.  SASAC's goal, 
he said, is to reduce the total number of Sompanies owned 
from the present thirty-eight to a target of twenty.  While 
some consolidation will occur, most of the reductions will 
come from outright sale of companies or their remaining 
assets.  Stock listed companies will be sold in the listing 
markets, but non-listed companies will be sold through the 
Dalian Ownership Exchange, a Dalian SASAC subsidiary. 
 
¶7. (SBU) The Dalian Ownership Exchange is one of two such 
exchanges in Liaoning Province and is responsible for 
Dalian's SOEs.  The Shenyang Exchange is responsible for the 
rest of Liaoning Province.  (Note.  Only Liaoning and 
Guangdong Provinces have multiple exchanges at the provincial 
level.  There are three central level exchanges located in 
Beijing, Shanghai, and Tianjin.  End Note) The Dalian 
Exchange disposes of assets via a web-based auction system. 
Mr. You told us that anyone is welcome to bid on the assets. 
 
SHENYANG 00000174  002 OF 002 
 
 
He said that SOEs being liquidated must use the exchange, and 
that private persons or companies were welcome to use it if 
they choose. 
 
¶8. (SBU) Auctions last for a period of twenty days, and will 
be renewed if no qualifying bids are received.  In order to 
bid, one simply logs on to the site and sets up a user 
account.  There are no restrictions as to who may bid.  Mr. 
Yu said the point of using the web is not only to make things 
convenient, but also to ensure that auctions are not 
manipulated.  A demonstration of the system showed something 
looking very much like real estate in an E-Bay mode.  The 
website is located at www.daee.cn. 
 
¶9. (SBU) Mr. Yu said that changes in ownership did not entail 
a reduction in assets under SASAC's control.  On the 
contrary, total asset value has increased by thirty percent 
to a total of USD 14.8 billion.  Yu said that net revenues to 
SASAC were up by sixty percent year on year.  He went on to 
say that he expected Dalian to continue to outperform both 
other local economies and the national economy. 
WICKMAN